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Is outcome-based contracting a trick?


“What should I read into the trend from customers to specify that they want an outcome-based contract. Is this just another way they want to load more risk onto the supplier?”

That was the question I faced when meeting with the Commercial Director for a large, international service provider this week. His experience of ‘outcome-based’ has not been good. He cited examples where the customer has been quite specific about the work they want done, but then added a clause that essentially offers them carte-blanche to enforce on-going rework at no cost. They specify requirements, but essentially say that if the outcome they achieve is not in line with whatever they may then need, the supplier must undertake work to deliver that outcome.

Clearly, this is indeed an unacceptable burden of risk. Essentially it abdicating responsibility for defining business needs and saying “I don’t really know what I want, but give me xyz and if I then decide I really wanted abc, you will do the conversion work for free”.

Given the speed of change in today’s markets and technologies, it is quite understandable that customers will struggle to define precise or static requirements. Indeed, in many cases, a key requirement is flexibility and change. It is not reasonable to expect that a supplier can absorb the consequence of that uncertainty. This situation demands a different approach to contracting and contract management.

In IACCM’s view, the first requirement is to undertake an honest and thorough analysis of the potential sources of uncertainty and to assess their severity and impact. We have developed a standard questionnaire to assist in this. Based on those findings, the parties need to review the right contract model – for example, the blending of performance-based, outcome-based or agile. This also predicts the level of collaboration and shared responsibility that will be appropriate.

However, suppliers are not absolved from responsibility in addressing today’s business environment. Few have worked on developing appropriate contract models or assessing the shift in internal competencies needed to negotiate or manage such agreements. Equally, they are reluctant to address the internal measurement and motivation systems that incentivize acceptance of unrealistic commitments and unaffordable risks.

In addition to the questionnaire, IACCM has developed new approaches to negotiation and guidance on producing relational contracts through either internal or multi-party workshops.

Without decisive action, suppliers are indeed right to fear many outcome-based contracts and the risks associated with them. But the answer is to help educate and develop the market because the forces that are driving this need for change will not go away. Ignoring them is an even bigger risk that responding with the wrong solution.

Secure signatures: the alternatives


We spend many hours worrying about the integrity and enforceability of our contracts and agreements. This leads almost 60% of organizations to still operate with physical signatures and physical mailing, with just 18% regularly using e-signatures. Others most commonly use a signature image which they insert on a pdf document.

Of course, many organizations have attempted to streamline contracting through reducing the need for signing. For example, many Master Agreements include terms that establish future orders and amendments will be unsigned. However, in this case, proof of delivery can be critical and this leads 38% to use courier or mail receipts. Surprisingly, 46% are happy to send important documents by standard email, even though this offers no security when it comes to proof of delivery. (When I say ‘important documents’, there are defined as those documents “When there is consequence if receipt is later denied or there is a dispute about original content“.

These were the findings of a survey that IACCM undertook on behalf of secure mail provider RPost during a recent webinar. These results – and the webinar itself – offer a fascinating insight to the risky approach adopted by many corporations and public agencies, as well as the inefficiency of others. The program (available on the IACCM website) provides excellent insight to the options available and suggests ‘best practices’.

My interest in this topic is because I cannot understand why the traction of secure email has not been faster and more pervasive. IACCM has explored this subject for about 10 years. Indeed, a 2005 conference featured a mock trial, at which an early version of secure mail was tested by a senior group of attorneys and found to meet legal needs in the US. I am led to believe that similar conclusions would be reached in other jurisdictions.

As trading relationships grow in significance, many organizations are recognizing that the integrity and reliability of their communications with their contracted partners is essential. This is not only about enforceability (litigation is, after all, extremely rare), but about ensuring common understanding and operation of requirements and obligations. Given the low cost of a system, it puzzles me that contracts and legal groups would not be at the forefront in advocating a system of Registered Email, which not only streamlines correspondence but makes it secure and reliable. I would be interested in hearing from anyone who can explain!

Why aren’t there more here?


Last week, just over 100 delegates assembled for IACCM’s Australia conference, hosted by National Australia Bank in Melbourne. The most common question I had from participants was “This is so valuable – why aren’t more people here?”

In the early years of IACCM, I used to worry about the volume of people attending events. But after visiting a number of other professional association conferences, I realized that it isn’t numbers that count: it is the quality of who is there and what the event achieves.

Some conventions are very much about reinforcing the current role and skills of their community. It seems to me that delegates attend primarily to be reassured of their value and relevance, even if it isn’t true. They are comforted by being told that their job is essential and it is only a matter of time before they are recognized as key contributors to their business.

IACCM has always been about leadership and change. It tackles the challenges of the volatile economic conditions that truly are making contract and commercial management critical competencies. In addressing those issues, it confronts its members with the need for leadership and it equips them with the facts and the data they need to drive executive action and support.

As a result, IACCM events appeal to those who aspire to be leaders and change agents. And that is not a role for the majority, who prefer a more comfortable life and to be reassured that they do not need to do anything, the future will come to them. However, with more than 2,500 participants attending IACCM conferences and workshops this year, that groundswell of leadership and change has become quite significant.

 

 

 

 

 

 

Competition and customer care


For those who have the pleasure of traveling on US air carriers, the fact that they win awards for being the least comfortable will come as no surprise. And just in case you were not already feeling exploited, they are apparently also the world’s most profitable airlines.

The airline industry is a great example of what happens when politicians intervene and competition becomes distorted. It is a story of both good and bad. Interestingly, as the supposed home of market capitalism, the US seems to be the region that has got it most wrong.

Whether you look at factors such as passenger comfort, or the quality of on-board food, or the inconvenience of extra charges, or the reliability of departure and arrivals, US airlines generally beat the rest of the world hands-down for lack of quality, reliability and customer care. As a market that is protected from overseas competition, it seems that airlines compete on the dubious basis of the least bad. Those that seek to break the mold struggle to survive.

Other world regions and carriers are not universally better, of course. Some of the European low-cost carriers can certainly stand shoulder to shoulder with the US airlines when it come to abusing their customers. But the difference is that they do not pretend to offer quality; they are unashamedly low-cost and their customers know what to expect. Yet even they are generally reliable when it comes to arrival and departure; it is rare for their passengers to experience hours sitting on the tarmac.

A reason for the more positive experience in Europe is the impact of consumer-based legislation which requires airlines to compensate passengers for delay. The airlines squealed, but in reality it has driven a tremendous increase in quality and fleet management, benefitting both the consumer and the provider. Also, the extent of deregulation has in most regions added substantially to customer choice and the effectiveness of competition.

However, when it comes to passenger comfort, it is airlines from the Middle East and Asia that are winning awards. It would be nice to report that this is due to inspired product development and outstanding management. But unfortunately that is often not the case. Once again, we see the hand of Government intervening. National airlines are seen as strategic assets and therefore in many cases receive significant subsidies and side benefits, such as cheap fuel.

For the passenger, there is no sign of open competition any time soon and market distortions will continue. Meantime, airlines continue to explore ways to further cut costs and maximize revenues; the latest example is the development by Airbus of a new seat, based on a bicycle saddle. And you thought existing planes were uncomfortable …..

 

Becoming a contracts professional


The comments on ‘The Role of a Contract Manager’ continue to grow and recently Ben Edwards made the following observation:

What I’d like to see more of if the professional recognition and development of Contractor side Contract Managers who receive little or no focus. When large contracts are issued, the contractor must have a ‘general manager’ that knows how to deliver to the contract terms etc. This skill set is greatly undervalued and client side Contract Managers would do well to ensure large contracts have this leader in place.”

 

I agree with Ben’s comment and this belief underpins much of what we do at IACCM. But those who aspire to this professional status must recognize that it depends on their readiness to behave as professionals. In other words, like all other high status disciplines, we need to operate in accordance with an established and consistent body of knowledge; we need some form of certification to confirm our credentials; and we must visibly espouse a commitment to continuous improvement.

 

The problem I see is that only a minority of practitioners have truly accepted that need and therefore those who should be leaders of a new generation of professionals are in fact setting no example and showing no commitment to raising the bar and training others to follow in their footsteps. As a result, the status of all suffers. 

 

In other words, too often we want recognition, but are not willing to take the steps needed to deserve or achieve it.

On a more optimistic note, a growing number of individuals are undertaking certification with IACCM and many employers are pushing for these credentials. However, the volume of activity tends to be at Associate and Practitioner levels and the more senior staff often stand aloof from the process of professionalization.

Change does not have to be complicated


Sometimes it can be so simple to achieve change.

Last week, I was talking with John, an IACCM member, about contract drafting and its impact on business results. We started also to discuss contract structure and its effect on ease of use – and at that point he came up with an interesting story.

John’s company undertakes a variety of complex services. He explained that the definitions section of their agreements is typically quite long and was regularly taking up to one and a half days to negotiate. This cut into the time available on the more substantive areas of the contract and regularly resulted in important issues being rushed.

Then, someone suggested moving the definitions to an appendix at the back of the agreement, rather than as part of the introduction. And sure enough, it worked. By the time the parties reached ‘Definitions’, they were already comfortable with the substance of the agreement and had a shared context for the definitions. So effort was saved and substantive issues were resolved.

Some of the most effective changes are also the simplest. Its just a matter of watching out for examples of inefficiency or ineffectiveness and then trying to identify a different approach. Contracts are especially in need of some innovative challenges.

The right to protest … but at what cost?


The quality and integrity of procurement is a big subject for many organizations right now. They are struggling to strike a balance between a rigid, savings-focused process, versus the need to have managers who use discretion and make good judgments.

Nowhere is this dilemma more pronounced than in Government. Public procurement rules mandate standards of fairness and objectivity that enshrine the right for protest – and the fear of protest often drives the use of narrow assessment criteria that result in a loss of possible value and, on occasion, the selection of the wrong supplier.

Just how prevalent are protests and to what extent do they have merit? I met last week with Nate Nash, CEO at GovTribe, Inc. Nate and his team collect data and provide analysis – offering some great insights to the world of public procurement. A recent report covered the subject of protests against US Federal contract awards.

Overall, I was surprised to see how few complaints are actually made. Most are in the defense sector. But perhaps even more surprising is the extent to which a few companies seem to monopolize the process – there are some serial protesters. Their success rate is generally not high. In fact, only one company stands out as having a significant rate of sustainment and that is Alvedra, a small, minority owned business providing food and medical supplies. Otherwise, less than 2% of protests are successful. Indeed, in some cases it may be they are driven more by ill-will than merit. It is worth remembering that in the US, anyone can protest an award; it is not limited to unsuccessful bidders.

Beyond the obvious costs of investigation, the impact of protest on the average citizen is potentially significant. Not only does a protest delay contract performance, but of far more importance is the effect it has on overall contract and procurement standards. The fear of protest has contributed to a narrow focus on process and avoiding criteria for supplier selection that might be challenged. This often results in the absence of qualitative criteria and consequent loss of discretion or judgment. Hence it is quite possible that the performance or capability of the winning supplier may leave much to be desired.

It is right that there is openness and transparency in the use of public money; but does this current right of protest serve us well? It appears to have a cost that outweighs its value. Surely the process of audit should be sufficient to monitor the integrity of public sector acquisition.

 

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